Does the Bullwhip Matter Economically? A Cross-Sectional Firm-Level Analysis
46 Pages Posted: 14 Aug 2018
Date Written: August 13, 2018
This paper investigates whether the bullwhip effect has economic consequences at the firm level. The bullwhip effect refers to the amplification of demand variability from a downstream site to an upstream one. Simply put, the bullwhip effect manifests when input production (in the case of manufacturing firms, orders in the case of retailers) is more volatile than output/product demand. In particular, we examine the relation between the bullwhip and various accounting/financial performance measures including equity returns, cash flows, operating costs, earnings, and earnings attributes such as earnings persistence, using a large panel of cross-sectional firm-level data. Performance is measured both in terms of first-moment mean effects and second-moment volatility effects. Contrary to the maintained assumption of operations management scholars, our analysis yields results that are inconsistent with the notion that the bullwhip has significant negative economic consequences at the firm level. In particular, we find almost no significant statistical/economic relations between accounting/financial measures of profitability and the bullwhip, both with and without covariate controls. These results are also robust after controlling for the potential endogeneity of the bullwhip.
Keywords: Bullwhip Effect
JEL Classification: M40
Suggested Citation: Suggested Citation